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A Sustainable Equilibrium?Craig Harris Welcome to a continuing series of Q & A from Craig Harris. The questions can be found here. In this segment, we are discussing question 9A. "What would a "sustainable equilibrium" look like?... and what am I even talking about?" Here's what I'm talking about. Below I have a resume for your competition in US jobs outsourcing. If you are a software engineer, here's a guy who will have your job. Why? He has a masters degree, knows 9 programming languages, and will work for the "totally awesome" sum of 10k per year... (and you won't).
So here's the problem. First of all... none of these questions can be studied in a vacuum. Prior to the GWB administration, the world had been moving rapidly towards globalization. Since that time, as I have discussed, significant risks to globalization have emerged due to the geopolitical tensions, but we are still on that path. Technology and the corporate bottom line are strong drivers. One of the main outcomes of a global economy is equilibrium. In other words... for those of you who are familiar with the Economist's "Big Mac Index" ...under equilibrium, a Big Mac would cost roughly the same percentage of your gross income in your local currency across the globe. Conversely, similar jobs would fetch similar salaries in your local currency. That's the idea behind their index. The job of writing a computer program for example, has a result. The result is the finished computer program. It doesn't matter if it was done in the US, India, Afghanastan, Zimbabwe or on the Space Station... as global equilibrium develops, that job has a price... and that price is the lowest price someone is willing to do the job for regardless of where they are. As the work flows to the low cost supplier, the standard of living of the low cost supplier would increase relative to the high cost supplier... so the high cost supplier would see a reduced standard of living as they reduced their salary requirement and the low cost producer would see an increased standard of living and their salary requirement would increase. When all is said and done, both people doing the same job on different continents would expect similar standards of living and similar salary requirements in terms of the purchasing power of that in local currency. So, the one thing that jumps out at you is that programmers with a Bachelors degree in the US are currently fetching upwards of 70k, while programmers in India with a masters degree are fetching 10k. That's what you call disequilibrium... and that's why the jobs are flowing overseas. That's also one of the many reasons the US dollar is declining. Using another example, US citizens assembling automobiles are fetching upwards of $20 an hour while the same job in Asia can fetch less than $1 a day in certain countries. So this isn't a small disparity, it's a huge, orders of magnitude disparity. That's an important point. We aren't talking about 5, 10 or 20 percent. We're talking about a factor of as much as 100x or more in some cases. Now here's the thing... globalization is a natural evolution as the world becomes smaller through technology. 20 years ago you couldn't ask a programmer in India to write a section of code and collaborate real time, because there was no way to do that. Today, using the Internet, you can. You couldn't have a call center in India 20 years ago because the cost was prohibitive. Now you can. So... the attraction for corporations given this level of technology is immense... and the better the technology gets, the stronger the incentive to be global. MY POINT BEING THAT TECHNOLOGY IS DRIVING GLOBALIZATION AND ANTI-GLOBALISM IS FIGHTING THE RELENTLESS MARCH FORWARD OF TECHNOLOGY. In my way of thinking, without significant geopolitical issues (like a world war), there is no stopping the globalization train. What does that mean? It means the globe is seeking equilibrium. WHEN EQUILIBRIUM IS ACHIEVED, THE SAME JOB SHOULD BUY THE SAME NUMBER OF BIG MACS ANYWHERE IN THE WORLD. Some will argue that I am ignoring the differences in governments... and I am... because as globalization progresses they will all become more and more like each other... gravitating towards the mean. You can see it happening now. As you can see from my examples, we are currently a long way off from equilibrium. What does this mean? It means that the standard of living of the high cost producers is going to go lower and the standard of living of the low cost producers is going to go higher. It also means that outsourcing in the US will continue until this equilibrium is reached, unless protectionist measures are drafted... and we've already seen what happens when you do that. My point there is that protectionist measures are seen as antiquated and worse for the invoker than the invokee. Here's another important point. I would argue the US has had a leg up (and a higher standard of living) than most of the rest of the world for two main reasons. The first is that the US owns the worlds reserve currency. The second is that the US has been in a technological leadership position. When you own the technology, as when you own the currency, it affords certain advantages, one of which is a higher standard of living. That said, the world is catching up. China is now in space... Russia is continues to develop some of the most advanced weapons in the world. Japan and much of the rest of the Pacific Rim are well established technologically. Korea owns the biggest manufacturing plants for leading edge heavy equipment construction in the world bar none. The US is choosing to "opt out" so to speak on the new frontier of genetic engineering and it will not be at the forefront of technology in that new frontier. My point is that the US technological advantage is narrowing... what's it's left with is the worlds reserve currency... but that's another subject which I will cover separately. One last thought on this... as this equilibrium begins to happen, the financial engineers are scrambling to mask the effects to the greatest degree possible, so as to avoid upsetting the financial markets. The CPI is not accurately reflecting the increases in the cost of living for US citizens, which was acknowledged by Pat Jackman, the head economist at the Bureau of Labor Statistics, which calculates the official inflation rate. He was quoted in the NY Post in June of 2003 as saying "the widely reported numbers understate the rising cost of life from one year to the next. The fact is, he says, 'more money is coming out of your pocket.' " We all knew that though, right? The government is rolling back the ages at which government entitlements are paid. By the year 2010, the retirement age will be 69. In short, in this age where both spouses are working, and working longer and harder to make ends meet, and as the debt levels spiral ever higher, disposable income, your standard of living, your entitlements and your national net worth has already been in a steady state of decline. This may be good for Prozac sales, but not for US citizens now competing abroad for jobs. We are already moving towards equilibrium, that's one reason why if you live in the US, it's getting progressively harder to make ends meet. Big differences between offshoring
and outsourcing: March 01, 2004 Mr Harris offers a free 30 day trial subscription to his daily market letter. For a free trial please contact bcharris@gate.net. The risk of trading commodity futures contracts can be substantial. You should therefore, carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. If you choose to open an account with Harris Capital Management, a Risk Disclosure will be sent to you. Please read it carefully before you invest. ### Harris Capital Management, Inc. CTA is a futures broker and registered Commodity Trading Advisor, meeting the needs of futures traders worldwide. They provide a high level of personal service to discriminating clients around the world, while offering commission rates comparable to discount brokers. All clients are handled directly by Mr. Harris. Copyright ©1995-2004
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